As a successful business owner, you’ve worked hard to get where you are. You know all about sweat equity and sleepless nights. So, doesn’t it make sense to want your business to continue after your participation in it ends through retirement, incapacity, or death? Having a good business succession plan in place could keep your business on track.
Without a business succession plan in place, however, your business could quickly derail.
What is a business succession plan?
Your company may be able to survive and thrive even without you, but it needs help. That’s where the business succession plan comes in. In order to have the succession plan work fluidly, you may want to consider tools directed toward engaging key employees to be in the proper mindset. For example, a key employee incented with synthetic equity is probably more likely to act in a manner that favorably affects entity value – both before and after the succession plan kicks in.
- Put together long-term plans for the business. Don’t just work on plans for this year. Make plans that will keep your company humming for generations.
- Identify future management. Keep an eye on younger members of management. Groom them for future top management positions.
- Buy life insurance. The death benefit proceeds from the insurance policy can be used to buy out a deceased partner’s business interest.
- Prepare a buy-sell agreement. This document lays out specifics on how a business partner’s interests can be bought or sold. For example, if one partner retires, who is allowed to buy their partnership interest? Without a buy-sell, the retiring partner could sell to anyone. With a buy-sell in place, the other partners may have the means to buy that interests before it is offered to anyone else. Buy-sells also cover other contingencies and are highly recommended.
What can happen if I fail to put a business succession plan in place?
Let’s take a look at a hypothetical example. Jason, Julia, Amy, and Will build a business – ComedyClubs, Inc. The company is a wild success – until Amy decides to retire and Will passes away. Jason and Julia are at wit’s end. None of their younger employees have the experience and talent needed to fill Amy and Will’s shoes.
Amy wants the company to buy out her share immediately, so she can move to Fiji. Will’s surviving spouse wants to sell his share of the business to the highest bidder, regardless of who that is. However, the company’s cash flow is suffering right now due to the economy so neither interest can be bought by the company or the surviving partners. Their choices are limited.
ComedyClubs, Inc. did not have to shut down. Had the partners engaged in any business succession planning, they could have survived to laugh another day.
Failing to Plan Means Planning to Fail
At Virtus Law, we can analyze your current business succession plans or put one in place. Contact us by calling 612.888.1000 or by emailing us at email@example.com. Our main office is in Minneapolis, with other offices located in Maplewood, Cambridge, Edina, Mendota Heights, and Red Wing.